1. Reading: Masters and Sanogo, 2002 in AJAE
AGEC 640 – Agricultural Policy September 13, Nutrition and Food Markets
Extra slides on imperfect information & food demand – not delivered in class
Reading: Masters and Sanogo, 2002 in AJAE

2. Now… what else might be useful to understand food intake?
Food is a public concern, but it is not a “public good”
Food demand generate subtle kinds of market failures
One reason is that its benefits are important but often delayed and often not observable, so we have:
credit and insurance constraints (the poor can’t borrow)
“behavioral” effects (people are predictably irrational)
weak self-discipline (addiction, obesity, etc.)
distorted perceptions (anxiety, obsession, etc.)
asymmetric information (need quality assurance)
example of Masters and Sanogo (2002)
study of infant foods in Bamako, Mali

3. Weight-for-height (WHZ) and height-for-age (HAZ)
of children in Mali, relative to international norms
The most severe nutritional deficits occur in a relatively brief period

4. Child mortality is closely linked to their weight-for-height
Source: Reprinted from Fawzi, W.W., M.G. Herrera, D.L. Spiegelman, A.E. Amin, P. Nestel, and K.A. Mohamed
“A Prospective Study of Malnutrition in Relation to Child Mortality in the Sudan.” The American Journal of Clinical Nutrition 65(4):

5. Why are nutritional deficits so severe between 4 and 24 months of age?
exposure to disease
due to initial introduction of water and solids, or
perhaps also more mobility and contact with others;
deficits in nutrient intake
due to differences between infant and family foods,
and failure to provide enough infant-quality foods.

6. Characteristics of infant foods
Infants need foods of higher nutrient density than the family diet,
from when they outgrow the nutrients in breastmilk
to when they can digest enough of the family diet.
High density is obtained from
high-cost ingredients (oilseeds or animal products),
mixed with low-cost staples (cereal grains, etc.)
but parents cannot observe an infant food’s
ingredient ratios and density, even after consumption,
because other factors affect growth

7. Economics of credence goods
Akerlof (1970) and others: If quality is unobservable, quantity will be…
zero! optimizing people will not respond to price
… except as remedied by trust in a brand.
==> sellers use advertising and high prices as visible commitments to quality, so
buyers must pay a premium over known costs, to buy guaranteed quality,
e.g. premiums paid for “brand-name” lawyers, pharmacists, auto mechanics, etc.

8. Table 1. Infant foods for sale in Bamako, Mali (1999)
Brand name Packaging Retail Prices (FCFA/unit)*
Mkt. Stores Pharmacy
Cérélac (wheat) 400 g. can
Cérélac (wheat) 200 g. box
Cérélac (rice) 400 g. can 1600
Cérélac (wheat/Banana) 400 g. can 1750
Cérélac (wheat +3 fruits) 400 g. can
Blédilac** (wheat) 250 g. can
Blédina** lactée fruits 250 g. box
Farinor** (maize/soy) 400 g. box
 Source: Masters and Sanogo, 2002.
MISOLA 500 g. bag
UCODAL (e.g. Sinba) 200 g. bag

9. Economics of credence goods (continued)
Akerlof (1970) saw an alternative remedy to lower the cost of credence goods:
third-party certification
mandatory testing => complete coverage
examples: FDA, USDA
limitations: tax-funded, incentive for fraud
fee-for-service => self-sustaining, self-policing
examples: ISO, UL
limitations: scale economies, may not emerge spontaneously

10. Benefits and Costs of Certification in Mali
benefits of certification
what is food-quality information really worth?
do some mothers value information more than others?
costs of certification
what are set-up and marginal costs?
what volume would be certified?
net gains from certification
do they justify the investment risks?
would the program be sustainable?

11. To detect what certification is worth, we need a experimental economics..
Vickrey (1961) and others: Preference-revealing auctions mimic real markets:
price is fixed by others; choice is to accept or decline
M&S experiment is aimed at very, very low-income people --
avoids using money, so choice is among infant foods only;
avoids calculations, so choice is easy and natural:
give mothers a can of Cerelac
offer to swap for increasing quantities of substitute products
record whether they accept or decline each choice
give them one of their choices, selected at random
The design is not quite strategy-proof; respondents may hold out for slightly more of each substitute than in ideal auction.

13. Summary statistics for willingness-to-pay results
WTP (FCFA per 400 g.)
ave. s.d. min. max.
WTP by product
1. Cerelac (market price)
2. Certilac
3. Anonymous product
4. Raw ingredients
WTP for premium
for 2 over 3: Certification
for 3 over 4: Processing

14. So certification has large benefits… but what would be its cost?
10 million FCFA/month for advertising
1 m. FCFA/mo. per 50 tests/mo. for staffing
0.6 m FCFA/mo. per 20 tests/mo. for transport
3,520 FCFA/mo. per test for consumables
1,000 x 400g. sold per test done
=> cost falls below ave. WTP at 30,000 bags/mo.
=> cost falls below 100 FCFA at 215,000 /mo.

15. How much food would be certified?
50,000 children aged 6-24 months in Bamako
100 g./day average consumption per child
=> 8 bags of 400 g. per month
low scenario: 39% use (now using Cerelac)
high scenario: 89% use (now using any food)
=> total potential is 155,000 – 350,000 bags/mo.

16. Would certification’s benefits exceed its costs?
Two ways to estimate:
(1) Each respondent has a different WTP
Some respondents’ WTP below cost
Construct demand curves & optimal quantity
Find economic surplus
(2s) All respondents have identical WTP
Average WTP is way above cost
Full market size is certified
Find total benefits - costs

17. Estimated certification demand and average-cost curves

18. Table 3. Consumer surplus and net benefit from certification
Case 1 Case 2
Consumer surplus approach
Equilibrium qty. certified (400 g. bags/mo.) 150, ,000
Net economic surplus gain (FCFA/month) 51,543, ,029,438
Net economic surplus gain (US$/year) 951,581 2,474,390
Cost-benefit analysis approach
Total estimated market size (400 g. bags/mo.) 154, ,138
Net economic benefit/month (FCFA/month) 51,713, ,138,264
Net economic surplus gain (US$/year) 954,710 2,439,476

19. OK, so quality information is needed… should testing be voluntary or mandatory?
Private solutions work if a “certifier” can
force users to pay (that is, exclude free-riders), e.g.:
Underwriters’ Laboratories (sellers pay for label)
Consumer Reports, CarFax (buyers pay each time)
and thereby capture enough revenue
to pay the cost of obtaining the information; while
maintaining a credible quality signal of their own!
Often it’s cheaper to use the government:
“value capture” from consumers can occur through taxation (e.g. USDA grades) or user fees (e.g. air traffic)
quality-destroying competition can be barred by mandatory standards and licensing
but the “quality” being upheld may not be valued by consumers; standards may be just an entry barrier to protect insiders

20. …Some conclusions Food intake decisions involve
not only observable attributes (taste, texture, color),
but also unobservable qualities and delayed effects.
Food choices can be hard to understand using economics on observable prices and quantities only
so sometimes we need inferences and experiments
but much of the “irrationality” in food consumption can be understood as constrained optimization
this allows us to plan public interventions that raise welfare, even though food is not a public good.